On Thursday, the ethereum network will receive a much-anticipated upgrade that will change the way transaction fees work and begin to destroy coins. It was supposed to take place on August 4, but it was pushed back slightly.
The modification is known technically as Ethereum Improvement Protocol 1559, or EIP-1559, and it will be included in a network upgrade known as the “London hard fork.”
Here are the four most important things you should be aware of.
The switch to ethereum is all about making transaction fees more predictable, making the network more usable. Fees are highly volatile, owing in large part to the network’s use of an auction system. Users compete with one another to have their transactions processed and verified by other users known as miners.
When the network is congested, transaction fees can skyrocket. The main issue, according to developers, is that the blind auction system makes fees highly volatile and unpredictable.
Instead of submitting bids, users will pay a “base fee” after EIP-1559, which will be determined algorithmically by the network based on how busy it is. They will also be able to pay a “tip” to a miner in order to have their transaction processed faster. The idea is that the network’s base fee will always be clear to users as they conduct transactions and will not fluctuate from minute to minute. If it is too high, users can wait for it to fall.
People are excited about EIP-1559 because it will destroy or “burn” ether, the network’s cryptocurrency.
Miners are not paid the base fee; otherwise, they could artificially congest the network in order to keep the fee high. Instead, it is destroyed.
Some investors believe that the fact that ether’s supply will be limited by burning will result in explosive price growth. However, developers claim that the impact on prices is far from certain. It also depends on transaction volumes, which determine how much gas is charged and thus how much ether is destroyed.
“We don’t know exactly what the effect will be in terms of ether burned until it’s deployed,” said Ben Edgington, an ethereum developer at ConsenSys.
Transaction fees on the Ethereum network may decrease because a more predictable base fee encourages users to overpay less frequently than the highest-bidder-wins system.
However, EIP-1559 does not seek to reduce transaction fees; rather, it seeks to make them more predictable. The base fee will fluctuate, rising when the network is busier and falling when things are quieter.
EIP-1559 is insignificant in comparison to ethereum 2.0, a complete overhaul of the network’s infrastructure that developers hope to complete by early 2022.
The network will transition from a “proof-of-work” to a “proof-of-stake” system in Ethereum 2.0. Miners use massive amounts of computing power to verify transactions in proof of work. However, under proof of stake, users will put up ether in exchange for the right to verify transactions and earn coins. Developers are also working on scaling up the ethereum network by adding more side networks and linking them. Ethereum insiders hope this will reduce congestion and transaction costs.